Pension changes
from April 2015

In April 2015, changes were made to the pensions system to give people more freedom over how they can save, invest or spend their pension benefits.

For defined contribution pension schemes, where you (and your employer, if you have one) pay money into a pension, the changes include the following:

You are able to access all your pension savings flexibly from the age of 55.

You will no longer have to buy an annuity when you retire.

The April 2015 changes do not affect defined benefit pension schemes, where your employer promises to give you a pension when you retire. But you may be able to transfer to a defined contribution scheme, which would allow you to take advantage of the new flexible rules.

A professional financial adviser will be able to give you advice about the best option for you and your family’s situation.

Be aware of pension scams. These can take many different forms and are increasing in the UK.

Defined contribution schemes

If you have a defined contribution scheme, you can choose to access your pension in a variety of ways after the age of 55.

A defined contribution scheme is a type of pension where you (and often your employer) pay money into a fund. The fund is invested and hopefully grows over time.

Lump sums

You can choose to take all your pension savings in one go. You will get 25% of your savings tax-free and you will pay tax on the rest as income.

Or you can choose to take out some of your savings as smaller lump sums. While you have enough money, you can do this as many times as you like. For each lump sum, 25% is tax-free and the rest taxed as income.

Points to consider

Taking lump sums now will mean less retirement income later on.

If you have other income, taking a large lump sum from your pension may push you into a higher income tax band. For example, you may have other income from investments, renting out a property or a part-time job. It is important to take financial advice. A lump sum could affect any means-tested benefits you are getting.

Adjustable income

You can choose to invest your pension savings in a fund that will provide you with a regular income. You can also take lump sums from the fund when you like. This option is called adjustable income or flexi-access drawdown.

When you move your savings into an adjustable income fund, you can take up to 25% of your pension savings as a tax-free cash lump sum. Any lump sums or income you take after that will be taxed.

Points to consider

If you have a workplace pension scheme, it may not offer an adjustable income option. You may be able to transfer into a personal pension and choose this option.

Visit Pension wise for information on how to find the best adjustable income product.

Adjustable income is risky, as it is possible that you may run out of money. This may happen if you take out too much of your pension savings, your investments perform badly, or you live longer than expected. It is important to get financial advice to work out the best option for your situation.

Annuity

An annuity is a financial product that gives you an income for life in exchange for your savings.

You can also choose to provide an income for someone else if you feel it is likely you will die before them.

At the time you use your savings to buy an annuity, you can take up to 25% of your pension savings as a tax-free, cash lump sum. The full amount of any income you get from the annuity will be taxed.

If you have or have had cancer, you are likely to qualify for an impaired-life annuity. This pays out a higher income than you would normally get from an annuity.

If you don’t qualify for an impaired-life annuity, you may qualify for an enhanced annuity. This pays more to people with particular lifestyles or people with certain health conditions who may not be expected to live as long. An enhanced annuity is less specific to your individual situation.

Before April 2015, most people saving for a pension had to buy an annuity. New pension freedoms mean there are now several other options.

Points to consider

The annuity rate you are offered will depend on your gender, where you live, whether you smoke and your health in general.

Unlike adjustable income, there is no risk of running out of money. The income is guaranteed for the rest of your life. However, annuity rates can offer quite poor value in some cases.

Your pension scheme may offer you their own annuity policy, but this won’t necessarily be the best option for you. You have the option of buying your annuity elsewhere to get a higher income. This is called the open market option.

Visit Pension wise for information on how to find the best annuity product. The Money Advice Service also has an online tool that can be a good starting point when looking for annuities. But remember that health conditions can affect the rate of an annuity and may mean it pays more. For this reason, it’s important to get financial advice if you’ve had a cancer diagnosis.

Which is the best option for you?

The best option for you will depend on:

the size of your pension savings

whether you want to leave any savings to your family or loved ones

how much income you and your family need to live on

your attitude to investment risk

whether you have any income from other sources

your health and how long you expect to live

whether you claim any income-related state benefits – these may be affected depending on how you choose to take your pension.

You don’t have to choose just one option. For example, you might use part of your savings to buy an annuity and leave the rest in an adjustable income fund. This could give you a secure income and lets you use the rest of your savings when you need it.

Defined benefit schemes

If you have a defined benefit scheme, you can access your pension when you retire. This is usually at age 65 unless you have ill health (see above). You will get a lump sum and a regular income for the rest of your life.

Defined benefit schemes are a type of pension arranged by your employer. It means they will give you a pension when you retire. This can also be called a ‘final salary’ or ‘career average’ scheme.

If you have a small amount of pension savings

You may be able to take all of your defined benefit pension as a lump sum if:

you are aged at least 55 (or earlier, if you have ill health)

the total value of your pension fund or funds is no more than £30,000.

You can take 25% of your pension tax-free. The rest will be taxed as income.

Transferring to a defined contribution scheme

If you have a defined benefit scheme, you may be able to transfer to a defined contribution scheme. This gives you more flexibility with accessing your pension. Before making any decisions, you should check what charges may be taken from your savings and whether you would lose any valuable benefits by transferring.

In general, defined benefit schemes offer good value. Switching to a defined contribution scheme is rarely beneficial, so make sure you take financial advice. If the value of your defined benefit scheme is £30,000 or more, you will have to get financial advice before you can make a transfer.

When you can transfer

Transfers may be allowed if:

you have a public sector funded pension scheme (for example, a Local Government Pension Scheme)

you have a private sector pension scheme.

Transfers are not allowed if you have an unfunded public sector pension scheme (for example, the Teachers’ Pension Scheme).

Financial advice

Pensions can be a complicated area. Specialist advice is a good way of making sure you think about all your options and make the most of your pension savings.

A professional financial adviser will be able to give you advice about the best option for your situation. They can also make sure you get the highest income from your pension. This can be particularly important when you are making decisions about how to access your pension.

The financial adviser should arrange a meeting to talk about your needs and ask questions about your finances and situation. They will then:

research the options offered by your pension

advise how the options could affect your tax position and eligibility for benefits

decide on what they would recommend

get quotes on the income or lump sum you can expect to get.

If you are happy with their advice, they will do any applications for you. In some situations, they may need to share all your medical information and contact your doctor.

Using a financial adviser means you will get more protection if they give you advice that later turns out to be wrong. There is a system to deal with complaints and, where necessary, to put things right.

How much does it cost?

A financial adviser will charge a fee for their service.

Financial advisers must agree their fees with you and how you will pay them in advance. You may agree an upfront fee, pay in instalments, or allow the adviser to take their fee from your pension savings. Many financial advisers will offer the first meeting for free.

Finding a financial adviser

You can find a financial adviser by asking family and friends for a recommendation, or by visiting the following websites:

Things you and your financial adviser should think about

What is the right choice given my cancer prognosis?

Could I get an impaired-life annuity? An annuity is a type of financial product. It gives you a regular income in exchange for your pension savings. An impaired-life annuity pays more to people with cancer and some other health problems.

Could an increase in savings or income affect any benefits I’m getting?

How much tax would I pay if I cash in part or all of my savings?

Are my family or loved ones provided for if I die? Which option is best for them?

Pension scams

Pension scams can take many different forms and are increasing in the UK. Some offer a ‘once-in-a-lifetime investment opportunity’, pension loans or upfront cash to convince people to transfer their pension savings. Some people are offered the chance to get their pension benefits earlier than they would normally be allowed to.

Some people have reported telephone calls offering them free pension reviews and have been pressured into making bad decisions about their savings. They may have taken out their pension savings without understanding the tax penalties. In some cases, people have been talked into transferring their pension into a high-risk investment and lost thousands of pounds, leaving them with less money for their retirement. They can also be faced with a large tax bill from HM Revenue & Customs.

If you get one of these calls, you should contact The Pensions Advisory Service. They can explain any warning signs and identify any risks or illegal activity.

If you think you might have already been targeted by fraudsters, you should contact Action Fraud on 0300 123 2040.

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